Franchise Due Diligence: The Franchise Buyer’s Best Friend
Franchise due diligence is not something that an inexperienced franchise buyer can adequately conduct on their own. While many prospective franchisees would argue that point, it’s a fact of life. Here’s why.
Buyers don’t necessarily or intentionally reject due diligence because they’re stubborn or think they know better. They simply don’t know what or how to analyze a franchise opportunity. Why would they if it’s a new endeavor?
Franchise Due Diligence Is Viewed Differently By Different Buyers
Every franchise buyer will say that they conducted due diligence, and that’s true to some extent. But what does that really mean? For some, it means trusting the salesman, the ‘free’ franchise consultant, or the president of the company. And interestingly enough, in some cases, it works out.
For others, it means actually reading the many pages of a franchise disclosure document and the franchise agreement. While in the majority of cases they will not understand all that they’re reading, it’s a major step forward. And yes again, for many of them, things can work out. Take another step and the buyer will visit with an attorney and an accountant. This is would be a sophisticated buyer, but the effort doesn’t represent full investigation of the franchise and the buyer’s place within it.
For years, the franchise industry was touted as a nearly no-fail approach to business ownership. That is blatantly untrue. Here are some eye opening figures on franchise loan defaults.
Half-Way Investigation Is Not Good Enough For Due Diligence
Let’s assume that you ride your bicycle twenty miles a day, four days a week for exercise. You’re good at riding a bicycle. Your time is where you want it to be. Your friends and family are more than impressed with your commitment, your stamina, your fit condition. That’s all wonderful, but you’re not in the same league as a professional bicyclist. The same is true for fledgling franchise buyers.
Reading franchise magazines and researching franchise opportunity websites will yield a sense of familiarity with the industry. In fact, a certain amount of franchise jargon will be absorbed; enough to start talking franchise companies and their representatives. At that point there’s a total imbalance between buyer and seller. And as the saying goes, ‘a little knowledge is a dangerous thing.’ Professional due diligence is a must. It’s the only way to level the playing field. Find it in the form of legitimate consultant, not a broker, or an attorney with a franchise specialty. Without top notch guidance, buyers often end up as unhappy franchisees.
Franchise Due Diligence Expertise
To reiterate, franchise buyers who include their attorney and accountant in their due diligence are better off than those who don’t. On the other hand, who is more likely to catch the red flags found in a disclosure document, your family attorney or a franchise attorney? Who is more likely to spot operating problems and relationship problems within a franchise system, your accountant or a trained eye that knows franchise systems? Get all the advice you can from franchise professionals, not just professionals.
No one and no one thing, including great due diligence, can guarantee franchise success. Even with careful preparation, the world changes once the buyer becomes an operating franchisee. But, avoidance of adequate preparation is a potential disaster waiting to happen. For a detailed accounting of necessary due diligence steps and other thought of the subject, read this page on BUYING A FRANCHISE. Good luck going forward and contact us with questions or concerns.